Tax cuts

If your tax rate were lowered tomorrow, how would it affect your work habits?

Maybe you would work harder — put in longer hours, take on special projects, do everything you can to get that next promotion. After all, lower taxes would mean you get to keep more of each dollar you earn.

Or maybe you would work less. After all, if you are happy with your current standard of living, lower taxes would mean that you could maintain it while putting in fewer hours at the office. Who needs that promotion when you’re able to keep more of the money you already make?

Or possibly you would work exactly the same amount, because life is too short to sit around making every decision based on what is in the tax code.

I feel like the last description is the most accurate one, which is why I don’t fully understand why some people think tax cuts are all they’re cracked up to be. The economics aren’t so cut and dry. Output doesn’t automatically go up just because tax rates are lower and it doesn’t go down just because they’re higher, either.

Accountants see this all the time. Successful clients make money in all kinds of economic circumstances. To them, taxes are irrelevant to the primary purpose of building a business that makes money. Most entrepreneurs don’t start businesses in order fight for lower tax rates. If your business doesn’t make money, the tax rate doesn’t matter much.

When a business does make money, the tax rate starts to matter. Some successful business people see the amount of taxes they’re paying and think, “That’s bullshit. I’m going to use my money to lobby for lower tax rates and complain to my CPA about it.”

Meanwhile, other successful business people see the amount taxes they’re paying and think, “Paying more in taxes is part of the cost of doing business. I’ll improve my business so I can make more money and hire a CPA to reduce what I owe.”

This gets increasingly complicated as businesses get larger and the numbers get bigger, of course. As we’ve seen, companies like Apple, Facebook, Caterpillar, etc. etc. go to great lengths — with help from their accounting firms — to avoid taxes, but even still, they’re not going to stop selling iPhones or backhoes or whatever it is that Facebook sells. They wouldn’t have taxes to worry about if they didn’t do those things. Besides, this kind of tax avoidance is a luxury that the vast majority of businesses cannot afford.

So, shorter — tax cuts aren’t the panacea that some people make them out to be. You might have some zealous clients who think otherwise, but you can just smile and nod at them while they rant.

Adventures in non-GAAP accounting

A report from Cornerstone Research found that accounting-related class action filings rose for the third year in a row. The increase came about thanks to “an unprecedented number of federal filings of class actions involving merger and acquisition (M&A) transactions” and many of those included a twist of non-GAAP:

“In nearly one-third of the M&A filings, plaintiffs alleged that the company failed to provide a reconciliation of non-GAAP measures to GAAP measures. This is the first time we have seen so many M&A filings with GAAP-related allegations.”

Carry on.

Accountants behaving badly

Chicago accountant Oscar Garrett allegedly forged some 1099-R forms in his clients’ names to get some big refunds. This resulted in a slew of charges including identity theft, income tax evasion, theft of government property, money laundering, mail fraud, wire fraud and forgery. Illinois Attorney General Lisa Madigan had this to say:

“The defendant operated a scam to defraud the state and his clients out of hundreds of thousands of dollars for his own profit,” Madigan said in the statement. “When selecting a professional tax preparer, consumers should make sure they hire a reputable accountant and always review their tax return before signing and filing it.”

I can’t help but think that return free filing would help eliminate some of these (alleged!) unscrupulous tax preparers. If taxpayers with simple tax returns got a notice from the IRS that stated their income, taxes withheld and refund, all they’d have to do is approve it, send it back and they’d get a check. There’d be no “selecting a professional tax preparer” and no worrying about whether or not he or she is reputable. All that would be required is reviewing, signing and filing (or the app equivalent). The dodgy tax preparer then doesn’t have access to people’s sensitive information that could be used for, you know, committing fraud.

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